Nontaxable & Taxable Fringe Benefits: A Refresher (Benefit Minute)
This issue of the Benefit Minute summarizes nontaxable and taxable fringe benefits that are provided to employees by employers. It reflects changes made by the Tax Cuts and Jobs Act. Many of these items are described in IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits. However, it’s important to understand the different types of fringe benefits that could be classified as either taxable or nontaxable.
Health & Accident Benefits
In general, both an employer’s contribution to employees’ accident and health coverage and payments made under an accident or health plan are included as nontaxable fringe benefits as long as such amounts are payments for medical expenses or payments for specific permanent injuries. However, some amounts are included under taxable fringe benefits, including payments that exceed actual medical expenses incurred, certain payments made to highly compensated employees under a self-insured health plan that discriminates in favor of these individuals and the cost of coverage provided to individuals who are not the employee’s spouse, child (under age 27) or dependent for health plan purposes.
The cost of employer-paid group term life insurance up to $50,000 of coverage is nontaxable. Coverage in excess of $50,000 must be imputed as income to the employee using the rates set forth in IRS Table I. If the group term life insurance discriminates in favor of key employees, the key employees lose the exclusion and are taxed on all employer-paid coverage at the higher of the actual premium cost or the Table I cost. In some cases, employees may be taxed on the cost of group term life insurance coverage they purchase for themselves if the premium rates charged by the insurance carrier straddle the Table I rates. The imputed income amount is the Table I cost of the coverage less any post-tax amounts paid by the employee.
Wellness rewards tied to a group health plan are generally non-taxable. These include increased employer contributions to the cost of health coverage, enhanced health benefits, higher health reimbursement account (HRA) allocations and larger health savings account (HSA) employer contributions. However, these amounts may be taxable to certain employees if provided on a discriminatory basis. Wellness rewards provided in cash (including gift cards and other items readily convertible into cash) or in the form of goods and services that are not medical care are also taxable at the fair market value. The only exception for goods and services is if the value of the non-cash reward is so small that it would be unreasonable to account for it. The cost of employer-provided gym memberships (whether paid in full by the employer or subsidized at a fixed amount) are taxable to employees. Use of athletic facilities on the employer’s premises is nontaxable to employees; however, beginning in 2018, tax-exempt employers will owe unrelated business income tax (UBIT) on the cost of providing an onsite athletic facility if it primarily benefits employees who are highly compensated.
Up to $5,250 in nontaxable fringe benefits may be provided to an employee each year under an educational assistance program. An educational assistance program is a written program for an employee’s educational expenses, including tuition, books, fees and supplies. Both undergraduate and graduate level courses may be paid or reimbursed, whether or not related to an employee’s current job responsibilities. The program cannot discriminate in favor of highly compensated employees. In addition, an employer may provide nontaxable education benefits to an employee if the education serves a bona fide business purpose of the employer or maintains or improves the skills needed by an employee in his current job position. Student loan repayments made by an employer (either directly or as reimbursement) are taxable income to an employee.
Qualified transportation benefits may be provided on a nontaxable basis as either an employer-paid benefit or through a compensation reduction agreement (pre-tax benefit). Qualified transportation benefits include parking, transit passes and commuter highway vehicles (vanpools) and are nontaxable up to a limit of $260 per month. Separate limits apply for parking and for transit passes/vanpools. These benefits may be provided directly or through a reimbursement arrangement; however, cash reimbursement for a transit pass is only permitted if the transit pass is not available for direct distribution by the employer.
Beginning in 2018, no employer tax deduction is allowed for qualified transportation benefits, whether employer-paid or through a compensation reduction agreement. Tax-exempt employers will owe unrelated business income tax on the cost of qualified transportation benefits provided to employees.
The value of tangible personal property provided to an employee during a meaningful presentation as an award for either length of service or safety achievement is nontaxable to the employee if the value of the award is $1,600 or less for qualified plan awards or $400 or less for other awards. An award of cash, cash equivalent, gift card or gift certificate in any amount is taxable income to an employee. In addition, awards in the form of vacations, meals, lodgings, tickets to sporting events and other similar items are also taxable.
Meals for employees that are furnished on the business premises of the employer for a substantial business reason are nontaxable. Substantial business reason may include meals furnished to food service employees during or immediately before or after working hours, meals furnished to employees who must be available for emergency calls during the meal period and meals when the work demands a short meal period. In addition, occasional meals provided to employees may be nontaxable if they are de minimis benefits as described below. Beginning in 2018, the 50% employer deduction limit for food and beverages also applies to these occasional meals provided by an employer. However, meal expenses related to employee recreation (such as holiday parties or annual picnics) are not subject to the 50% limit on deductions when incurred primarily for the benefit of non-highly compensated employees.
De minimis benefits such as occasional use of business copy machines and printers, meals, holiday and birthday gifts of low value, and occasional tickets are nontaxable as long as they have so little value that it would be unreasonable or administratively impracticable to account for them. Cash and cash equivalents are always taxable.
Services offered to customers in the ordinary course of business may be provided as nontaxable fringe benefits to employees as long as the employer does not incur substantial additional to provide the service to employees and the service is made available on the same terms to both highly compensated and non-highly compensated employees.